There are many taxes that we must navigate and deal within today’s world. There is the income tax, property tax, capital gain tax and estate tax to name a few. But if you are self-employed there is another tax that you need to be familiar with, and one that is often overlooked and forgotten about until there is a surprise tax liability due at tax time. I’m talking about the self-employment tax.
What is the self-employment tax?
According to the IRS the self-employment tax is “a tax consisting of social security and Medicare taxes primarily for individuals who work for themselves. It is similar to social security and Medicare taxes withheld from the pay of most wage earners.”
The self-employment tax rate is 15.3% on net earnings from your business earnings and it consists of two parts. 12.4% for social security and 2.9% for Medicare. For 2023, you pay the 12.4% social security tax on up to $160,200 of your net earnings and you pay the 2.9% Medicare tax on all of your net earnings. Additionally, if your earnings are above $200,000 ($250,000 married filing jointly) then you pay an additional 0.9% Medicare tax.
Depressing I know.
This tax is the combined employer and employee tax rate that employers and employees pay at companies and when the employees are W2 income employees.
Typically, if you file schedule C to report your business income you will be needing to calculate what self-employment tax you may owe but there are other scenarios where you will need to calculate your self-employment tax as well.
There are no real credits and deductions that can help reduce your self-employment tax liability like there are for income tax, but you do get to deduct 50% of your self-employment tax liability on your form 1040, schedule 1, part 2, line 15. Speaking of tax forms, to calculate your self-employment tax you need to be familiar with schedule SE because schedule SE is the form you use to calculate your self-employment tax liability. Remember, your self-employment tax liability is calculated off your net earnings from your business.
The only thing that will lower your self-employment tax liability is if your net earnings decrease. However, I wouldn’t go buying stuff for your business that you don’t need just to reduce your net earnings to avoid paying more in self-employment tax. Instead, make sure you are setting aside a part of your earnings for income tax and self-employment tax so that you can be prepared and avoid surprises when tax time comes.
Moreover, please discuss your specific tax situation with your financial advisor, tax preparer and/or CPA to get advice specific to you.